Taxing times pay off for H&R Block

Record Q3 comes on heels of complex tax-law changes

KANSAS CITY, Mo. -- Complicated tax-law changes were cited Wednesday by financial services firm H&R Block as it reported record third-quarter earnings and said it was raising its estimates for the full year.

The company, best known for its tax preparation services, earned $29.6 million, or 16 cents per share, up from $4.5 million, or 2 cents per share, in the comparable quarter last year.

Analysts had been expecting the company to earn 9 cents a share, according to a survey by Thomson Financial/First Call.

The company's third-quarter performance was enhanced by the previously announced early adoption of new accounting standards that resulted in the elimination of goodwill and certain other intangible asset amortization as of May 1, 2001.

The adoption of the standards represents $11.9 million, or 6 cents per share, of the improvement over the prior year's third quarter.

Revenue for the third quarter ended Jan. 31 increased 11 percent to $728 million, compared to $656 million in last year's third quarter.

"We had a great start to the tax season and an outstanding third quarter. We saw growth in the number of tax clients that we served in January, and our clients' tax returns were more complex due to changes in the tax laws," said Mark Ernst, president and chief executive officer, H&R Block.

"It's difficult to fully predict results for the entire tax season based on early season filings, but overall trends indicate that we're on track with previously announced growth targets for our U.S. tax operations," Ernst said.

Given continued strength as well in the company's mortgage operations, Ernst said the firm now expects to earn $2.20 to $2.30 per share for the full fiscal year, up 45 to 50 percent over last year's earnings.

He said revenue growth would fall within the company's target range of 10 to 15 percent for the year. Analysts already estimate the company will earn $2.25.

The stock of H&R Block
HRB, -1.76%
closed up 10 cents to $50.16 on Wednesday ahead of the after-hours earnings release.

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H&R Block's U.S. tax operations accounted for more than half the company's third-quarter revenue. The unit reported revenue of $379.2 million, an increase of $57 million, almost 18 percent, compared with $322 million in the same quarter a year ago.

Increases in both the number of clients and average fees per client, along with strict cost management, were the primary contributors to the segment's improved results.

From Jan. 1 through Jan. 31, tax preparation and related fees from company-owned and franchised offices increased 16.5 percent compared with the same period last year, while the number of tax returns prepared increased 7.4 percent compared to last year.

As of Jan. 31, H&R Block had filed 3.5 million federal returns electronically, representing a 7.8 percent increase over the prior year. Through the first month of the tax season, 95.5 percent of returns processed by the company were filed electronically.

For the period Jan. 1 through Feb. 15, company-owned and franchised operations served 8.9 million clients, an increase of 4 percent over the same period last year. For the same period, tax preparation and related fees increased 12.9 percent to $964.2 million.

"While we are very encouraged by our strong start this tax season, a significant share of the tax filing season remains," Ernst said. "Our analysis of early season data is that filing patterns to date are consistent with our net client growth expectation of 3 to 5 percent for the full year."

Ernst said average fee increases are expected to be lower in the fourth quarter than those experienced in the third quarter.

"The increase in average fees to date is in large measure due to greater complexity from specific provisions of the tax laws affecting early filing clients. We don't expect to see this level of increase in average fees continue late into the tax season," he said.

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